RE-EXAMINING THE FELDSTEIN-HORIOKA HYPOTHESIS: SAVINGS-INVESTMENT DYNAMICS IN NIGERIA: EVIDENCE FROM ARDL AND NARDL APPROACH

Sulaiman Maigari Salisu and Yusuf Shamsuddeen Nadabo
Volume 12 Issue 3

Abstract

This study investigates the dynamic relationship between domestic savings and investment in Nigeria: testing the validity of the Feldstein-Horioka (F-H) hypothesis from 1980 to 2023. The study employs Autoregressive Distributed Lag (ARDL) and Nonlinear ARDL (NARDL) models to examine the long-run and short-run interactions between savings and investment. Additionally, the Toda-Yamamoto (T-Y) causality test is applied to determine the direction of causality between the variables. The ARDL results show a strong and positive long-run relationship between savings and investment, consistent with the F-H hypothesis, indicating low capital mobility. Specifically, a 1% increase in savings leads to a 1.229% rise in investment, while a 1% rise in investment increases savings by 0.728%, both statistically significant. The NARDL model reveals asymmetric effects: positive savings shocks significantly increase investment, while negative shocks have insignificant effects. In the short run, savings strongly influence investment, and vice versa, with significant error correction terms indicating convergence toward equilibrium. The Toda-Yamamoto test confirms bidirectional causality between savings and investment, reinforcing the notion of limited capital mobility in Nigeria. The findings suggest that Nigeria’s financial markets are not fully integrated with global capital markets. Policymakers should focus on reducing structural barriers and strengthening the financial system to enhance capital mobility and attract foreign investments. This study’s novelty lies in its application of both linear and nonlinear models to capture the asymmetric dynamics of savings and investment. It also provides empirical support for the F-H hypothesis in the Nigerian context, using robust causality tests and recent data. Keywords: Savings, Investment, Capital Mobility, Feldstein-Horioka Hypothesis, Nigeria

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